Merger Accounting

12 Months Ended

Dec. 31, 2019

On March 13, 2019, the Company completed its merger with Arsanis. Based on the Exchange Ratio of 0.5702 , immediately following the Merger, former Arsanis stockholders, Arsanis option holders and other persons holding securities or other rights directly or indirectly convertible, exercisable or exchangeable for Arsanis common stock owned approximately 32.9% of the outstanding capital stock of the combined organization on a fully diluted basis, and former X4 stockholders, holders of options or warrants to acquire X4 capital stock and other persons holding securities and other rights directly or indirectly convertible, exercisable or exchangeable for X4 capital stock owned approximately 67.1% of the outstanding capital stock of the combined organization on a fully diluted basis. At the closing of the Merger, all shares of X4 common stock and X4 preferred stock then outstanding were exchanged for Arsanis common stock.

In addition, pursuant to the terms of the Merger Agreement, the Company, for accounting purposes, assumed all outstanding stock options to purchase shares of Arsanis common stock at the closing of the Merger. At the closing of the Merger, such stock options became options to purchase an aggregate of 271,230 shares of the Company’s common stock after giving effect to the Reverse Stock Split.

The total purchase price paid in the Merger has been allocated to the tangible and intangible assets acquired and liabilities assumed of Arsanis based on their fair values as of the completion of the Merger, with the excess allocated to goodwill. The following summarizes the preliminary estimate of the purchase price paid in the Merger (in thousands, except share and per share amounts):


Number of shares of the combined organization owned by Arsanis stockholders ⁽¹⁾	2,440,582
Multiplied by the fair value per share of Arsanis common stock ⁽²⁾	$	18.66
Fair value of consideration issued it effect the Merger	$	45,541
Fair value of replacement awards held by former employees, board of directors and consultants of Arsanis that were vested as of the Merger.	817
Purchase price:	$	46,358

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⁽¹⁾ The number of shares of 2,440,582 represents the historical 14,643,737 shares of Arsanis common stock outstanding immediately prior to the closing of the Merger, adjusted for the Reverse Stock Split.

⁽²⁾ Based on the last reported sale price of Arsanis common stock on the Nasdaq Global Market on March 13, 2019, the closing date of the Merger, and gives effect to the Reverse Stock Split.

The following summarizes the allocation of the purchase price to the net tangible and intangible assets acquired (in thousands):


Cash, cash equivalents and restricted cash	$	26,406
Other current assets	2,147
Property and equipment, net	68
IPR&D indefinite-lived intangible assets	4,900
Other assets, non-current	486
Current liabilities	(5,205)
Loans payable	(8,713)
Other liabilities, non-current	(840)
Goodwill	27,109
Purchase price	$	46,358

The goodwill of $27.1 million is not tax deductible and represents the excess of the consideration paid over the fair value of assets acquired and liabilities assumed. Goodwill is mainly attributable to the enhanced value of the combined company, as reflected in the increase in market value of the shares of Arsanis common stock following the announcement of the Merger with X4. During the quarter ended June 30, 2019, goodwill was adjusted by $298 thousand to reflect a change in the allocation of purchase price to the fair value of an acquired operating lease as of March 13, 2019. There have been no other changes in the value of goodwill from the acquisition date to December 31, 2019, and goodwill was not impaired as of December 31, 2019 based on management's annual quantitative impairment test.

The Company incurred costs directly related to the Merger of approximately $1 million, which were recorded in general and administrative expenses, for the twelve months ended December 31, 2019.

The in-process research and development intangible assets represent the acquisition-date fair value of three development programs acquired from Arsanis, which the Company refers to as the ASN200, ASN300 and ASN500 programs. The fair value of the IPR&D intangible assets was based on assumptions that market participants would use in pricing the assets, based on the most advantageous market for the assets assuming highest and best use. The fair value was determined by estimating the resulting revenue from out-license arrangements related to the projects, and discounting the projected net cash flows to present value using a weighted average discount rate of 20%. These IPR&D intangible assets are not amortized, but rather are reviewed for impairment on an annual basis or more frequently if indicators of impairment are present, until the project is completed, abandoned or transferred to a third party. As further described in Note 16, during the year ended December 31, 2019, the Company entered into arrangements with two third parties that transferred the rights to develop and commercialize the programs underlying the IPR&D intangible assets. Accordingly, the Company derecognized the IPR&D intangible assets through a charge to "loss on transfer of nonfinancial assets" during the year ended December 31, 2019.

The following supplemental pro forma information presents the Company’s financial results as if the acquisition of Arsanis had occurred on January 1, 2018 (unaudited)


	Year Ended December 31,
(in thousands)	2019		2018

Revenue	$	—	$	3,500
Net loss	$	(57,820)	$	(76,248)

The above unaudited pro forma information was determined based on the historical GAAP results of the Company and Arsanis. The pro forma consolidated results are not necessarily indicative of what the Company’s consolidated results of operations would have been if the acquisition was completed on January 1, 2018. The pro forma consolidated net loss includes pro forma adjustments primarily relating to the reclassification of transaction costs and severance payments directly related to the closing of the Merger of $2.7 million from the twelve months ended December 31, 2019 to the twelve months ended December 31, 2018.